Obama up 8 points

[Darius871]

I should note that I'm not even against free trade or comparative advantage in principle. I'd just like to see it play out with actual free competition and natural market corrections instead of inflating a bubble with fiat debt. That's just a recipe for disaster, though that might be just what commies like Kid want.

[KrazyHorse]

Originally posted by Darius871


I refuse to assume they'll always think U.S. T-Bonds will remain stable forever, particularly in light of the last two months. All it would take is demand from the Bank of China and some oil exporters to raise T-Bond interest rates, or pour more of their ample foreign exchange reserves into alternate investments with a higher rate of return, or both, to force a correction of the trade imbalance.

Would the correction be hard on their export numbers in the short-term, and "stupid" to that extent? Yes. Would it be less stupid to maintain their short-term exports with a fiat house of cards that isn't sustainable beyond a span of decades and would be better resolved by a gradual correction rather than a sudden crisis? Not necessarily.

My point is that the large, persistent trade imbalances are due to stupidity of Chinese central government and a few other actors. Does their stupidity threaten the US (and all other economies) by creating the possibility of shocks to nominal price and interest levels in multiple countries? Yes. But this is not a case of the Chinese engaging in nefarious tricks to hurt the US and help themselves. It's a case of the Chinese being stupid and hurting both themselves and the US.

[Kidlicious]

Originally posted by KrazyHorse
Kiddy, you don't have a clue what you're talking about.

In order to not be stupid your response needs to be as follows:

Yes, as an aggregate all trade is good for the US. However, since the US' comparative advantage is in high-skills professionals, financial services and capital goods trade tends to benefit the upper end of the income scale disproportionately. In fact, it does so disproportionately enough that trade actually negatively impacts the low end of the income scale (providers of low-skills labour).

My response is then as follows: there is little evidence to support the claim that low-skills US citizens are actively harmed by increases in trade, but even if we grant your premise shouldn't we be able to arrange a transfer from those who benefit from trade to those who are hurt by it (since we have made a positive gain overall this should be possible). While we're at it, what is the moral difference between those who are harmed by trade and those who are harmed by advances in technology? Why should we grant benefits to one and not the other? Remember, Japan is just a technology. Why are we even attempting to disaggregate these factors? If the income distribution becomes more skewed yet overall wealth increases shouldn't we be able to lift everybody up with increased transfers of wealth?

There. You've managed to have a sensible discussion about economics, Kid. I'm proud of you.

Financial services is not a comparative advantage. The reason we have such a large financial sector is because 1) we are so much more in debt, and 2) globalization has made the financial system much more complex. Again, this is a much different situation than what England had after repealing the Corn Laws. In that situation they were able to dominate the manufactured goods world market.

[Darius871]

,

Originally posted by KrazyHorse


My point is that the large, persistent trade imbalances are due to stupidity of Chinese central government and a few other actors. Does their stupidity threaten the US (and all other economies) by creating the possibility of shocks to nominal price and interest levels in multiple countries? Yes. But this is not a case of the Chinese engaging in nefarious tricks to hurt the US and help themselves. It's a case of the Chinese being stupid and hurting both themselves and the US.

Yeah, we're not really in disagreement then. Once either side of the Pacific comes to its senses and the painful "correction" comes, we might see free trade as it is supposed to operate. That might not be such a bad thing, provided there isn't a nuclear war or two in the interim.

[KrazyHorse]

Originally posted by Naked Gents Rut


Treasuries do pay interest, however, so the U.S. is paying the rest of the world a small but real premium for the ability to consume more in imports than the U.S. exports

It means that the US is paying an extremely low real interest rate (occasionally negative!) in order to consume more now than it produces. If the Chinese choose to start reducing their holdings of US debt then the US will start to produce more than it consumes. This will mean an increased demand for US labour. If the Chinese and others do this rapidly then they will create price inflation in the US as there will be more little green pieces of paper floating around. This will be bad, as nominal price shocks do cause economic dislocation.

The issue is not that the Chinese are collecting an extremely small amount of interest on their accumulated surplus; people in the US should be grateful whenever anybody is silly enough to lend money at a low interest rate. The issue is that the Chinese and others have decided that they like little green pieces of paper so much that they have induced American producers to make many more of them than otherwise, and that the Chinese may suddenly decide that they don't like that paper as much as they used to and suddenly dump it back into the US (even if they were to GIVE it all back by mailing every American an envelope full of Benjamins it would still cause similar trouble).

[KrazyHorse]

Financial services is not something you can have a comparative advantage in? Let me tell you a story about the Manhattan Car Crop....

[Darius871]

Originally posted by KrazyHorse
If the Chinese choose to start reducing their holdings of US debt then the US will start to produce more than it consumes. This will mean an increased demand for US labour.

Problem: This supposes that U.S. labor will ever be cheap enough to meet that demand. They'd be marching in the streets with torches and pitchforks before the day they work for anything near what Chinese laborers work for. In any event, the minimum wage - which no elected politicion in his right mind would repeal - is already leaps and bounds more than what the average Chinese unskilled laborer makes, so suddenly producing no more than what we import would cause the price of all consumer goods to skyrocket. This, too, would probably cause massive social unrest. This scenario is precisely why it was so dangerous to let things get to this point in the first place.

[KrazyHorse]

Darius, the increased demand for US labour will INCREASE the labour wage in the US until supply matches demand.

[snoopy369]

Yeah, America certainly has a comparative advantage (at the moment) in the financial services sector. That advantage is called "New York City", as well as the preponderance of financial software companies that do business in the US. Sure, it's a circular argument to some extent, but that doesn't make it any less true.

[Naked Gents Rut]

The issue is not that the Chinese are collecting an extremely small amount of interest on their accumulated surplus; people in the US should be grateful whenever anybody is silly enough to lend money at a low interest rate.

I never said it was the main issue. I was just pointing out that selling U.S. Treasuries to Japan and China isn't functionally the same as "giving them little green pieces of paper." Even at extremely low interest rates, the interest on over a trillion dollars adds up.

The issue is that the Chinese and others have decided that they like little green pieces of paper so much that they have induced American producers to make many more of them than otherwise

The Chinese aren't accumulating American debt because they like "little green pieces of paper." They're accumulating it because they depend on high levels of economic growth to maintain domestic stability and can only maintain their current growth levels via a massive amount of exports to the U.S.. American consumers don't save enough to purchase the necessary amount of exports with domestic capital, so the Chinese have to lend American consumers Chinese savings in order to keep the whole process going. Obviously this is unhealthy and dangerous over the long-term, but I don't think the Chinese are "stupid" for doing this. Their incentives just aren't conducive to the creation of a more healthy and balanced trade relationship.

[KrazyHorse]

Originally posted by Naked Gents Rut


I never said it was the main issue. I was just pointing out that selling U.S. Treasuries to Japan and China isn't functionally the same as "giving them little green pieces of paper." Even at extremely low interest rates, the interest on over a trillion dollars adds up.

The capital account of the US is actually close to in balance despite the US' NIIP being strongly negative. This is because the Chinese lend money to the US at low rates while the US lends money to other people at high rates. Talk about comparative advantage...

[Kidlicious]

Originally posted by KrazyHorse
Financial services is not something you can have a comparative advantage in? Let me tell you a story about the Manhattan Car Crop....

I don't think you got my point. Do you count overseas shipping as an advantage of trade?

[Seedle]

Originally posted by KrazyHorse
If the Chinese choose to start reducing their holdings of US debt then the US will start to produce more than it consumes. This will mean an increased demand for US labour.

Wait, what, how does this work? I'm not arguing with you, I'm just ignorant. And unsure your language is clear. Did you skip a step?

[Kidlicious]

Originally posted by KrazyHorse
If the Chinese choose to start reducing their holdings of US debt then the US will start to produce more than it consumes. This will mean an increased demand for US labour. If the Chinese and others do this rapidly then they will create price inflation in the US as there will be more little green pieces of paper floating around. This will be bad, as nominal price shocks do cause economic dislocation.

Umm... No that's wrong. What will go up is interest rates. That will kill demand. We'd be looking at deflation.

[Darius871]

Originally posted by KrazyHorse
Darius, the increased demand for US labour will INCREASE the labour wage in the US until supply matches demand.

Even supposing that's true (which I don't buy given that the large supply of unemployed, underemployed, and immigration would likely cover that demand, but just supposing that's true), the fact remains that a [widget] now being made by a Chinese unskilled laborer for $1.4/hour would start being made by a U.S. unskilled laborer for $7-30/hour (depending on whether unionized, which larger factories are more likely to be), which would drastically increase the price of consumer goods, unless I'm missing some part of the equation. No shortage of people are barely able to scrape by as it is, without having to see daily expenses multiply by an order of magnitude. It would be disastrous.